What is a Bare Trust?
A bare trust is a basic trust in which the beneficiary has the absolute right to capital and assets of the trust and the income generated by these assets.
The trust assets are held in the name of a trustee, who is responsible for managing the assets of the Trust prudently to generate maximum benefit for beneficiaries or in accordance with legal guidelines beneficiaries or creator of the trust . However, the trustee has no say in how or when the capital or income from the trust is distributed.
Key points to remember
- Bare trusts are bare trusts where the beneficiary, as long as he or she is above 18 years of age, has full rights to the capital, assets, and income in a trust.
- Bare trusts offer tax benefits to individuals who created the trust while the beneficiaries are taxed at the rate in effect or may be subject to exceptions if they have low incomes.
Understanding bare trusts
Also called bare trusts or trusts bare, bare trusts are widely used by parents and grandparents to transfer assets to their children or grandchildren. Bare trust rules allow beneficiaries to decide when they want to recover the assets of the trust until they are at least 18 years in the UK. Recipients may use the capital and the income they inherit a bare trust as they please.
A bare trust is established by a settlement agreement or a declaration of trust. In the simplest form of a bare trust, the assets left by the person who created the bare trust belong to the trustee and the beneficiary. But the trustee, in a bare trust, has no responsibilities or powers. They act according to the instructions of the beneficiary.
There are key differences between a bare trust and other types of trusts. Revenues generated by the trust assets in the form of interest, dividends and rents are taxed to the beneficiary because he or she is the legal owner of the assets. This arrangement can provide beneficiaries with significant tax relief if they are people of low pay that tax policies generally favor people over trusts. Beneficiaries should report your income generated by the assets of the trust and capital gains that exceed the annual exemption in their tax self-assessment income.
This tax will be levied on the creator or settler of the trust, however, if the beneficiary is under 18 years. For example, a grandparent opening a naked trust for an infant grandchild would have to pay taxes on the income generated from the assets of the trust until the beneficiary infant is 18 years of age.
Tax Implications for Estates of Bare Trusts
Beneficiaries may also be required to pay inheritance tax if the settlor of the trust dies within seven years of the establishment of the trust, as bare trusts are treated by tax authorities as potentially exempt transfers. No fee will be due, however, if the settler these seven years survives. There is no tax implication for the individual who creates a naked trust because he or she relinquishes the legal title to the assets when they are transferred to the trust.
Once one or more beneficiaries of a bare trust is defined, the decision can not be undone.